Medicare Part D: Private Versus Public Market Efficiency

Democrats in the House of Representatives’ Oversight and Government Reform Committee released a groundbreaking study on October 15, 2007 that revealed major cost inefficiencies in Medicare Part D. The prescription drug program began in 2006 and now provides insurance coverage to approximately 24.1 million Americans over the age of 64. Unlike other parts of Medicare, Part D is unique in light of the fact that the federal government does not solely control the management of this program. According to Republican Senate Majority Leader Bill Frist, under the Medicare Modernization Act of 2003, the prescription drug program was designed to “allow competitive forces in the private market [to] generate the best savings for seniors.” As a result, Part D is administered by a partnership between private insurers and Medicare officials. Republicans are in favor of this insurance plan, which results in less government control of Medicare, while Democrats fear that “privatizing the delivery of the drug benefit has enriched the drug companies and insurance industry at the expense of seniors and taxpayers.” This has led Democrats to scrutinize the program’s success and release an unfavorable review of its shortcomings, which include high administration costs and lack of drug rebates for Medicare beneficiaries. While both Democrats and Republicans make valid points regarding the advantages and disadvantages of this program, it has become apparent that the federal government must closely monitor and evaluate the success of Medicare Part D to ensure the efficiency of the system for today’s seniors.

Democrats’ evaluated Medicare Part D based on twelve private insurers, including Aetna and Humana, which represent 75% of the current Medicare enrollees. The goal of the study was to determine “negotiated price discounts, rebates, and other price concessions obtained from drug manufacturers and pharmacies by Medicare drug plans; and the extent to which, and the methods by which, these discounts, rebates, and other price concessions obtained by Medicare drug plans are passed on to beneficiaries.” Results indicated that fifteen billion dollars could have been saved in Medicare costs in 2007 when compared to several other federal government prescription drug coverage programs and pharmacy benefit managers. These added expenses were attributed to several weak points as outlined below. First, administrative costs, sales costs, and profits were six times higher than those for Medicaid (please see image to the left). Second, drug spending was more than three times higher than Medicaid spending due to poor negotiated discount rates from drug manufacturers for prescriptions. Even with the smaller rebates from drug companies, Medicare Part D private insurers displayed increased profit-driven behavior by keeping more than their fair share of the drug rebates rather than sharing them with Medicare enrollees. Without any help from insurance companies, consumers who fell victim to the coverage gap or “donut hole” of Medicare Part D, were forced to pay for prescription drugs out of their own pocket . Excessive profit motives and lack of drug price discounts are key arguments that reinforce the need for government oversight. Furthermore the government needs to ensure that the advantages gained in a privatized program remain equitable and perform up to set health care standards.

On the other side of the spectrum, Republicans and President George W. Bush who advocate for the public-private partnership design of Medicare Part D state that the plan has “saved seniors money since it began offering benefits in 2006.” A survey conducted by J.D. Power and Associates further supports the prescription drug plan’s success by showing high levels of satisfaction by Medicare Part D enrollees. The analysis shows that about 75% of beneficiaries are “delighted” or “pleased” with their prescription coverage plans. The two areas that participants wanted to improve were education and communication regarding Medicare Part D plans. As portrayed in the image to the right, most states have over fifty insurance plan options, which can be very overwhelming for consumers. Nevertheless, Republicans and other supporters of Medicare’s prescription drug care plans believe that the overall program has been very successful in this early stage, and will continue to improve over time. Republicans of the House Oversight and Government Committee stated that, “The program operates smoothly and at significantly less cost than expected. As such, the concerns expressed by the majority (Democrats) are relatively minor in scope and not supported by accurate and meaningful analysis.”

With the controversial nature of the potential benefits and downfalls of Medicare Part D identified by the major political parties, it is important the government ensures that the program is staying true to its original intentions. The private sector may be able to generate more price competition that will allow seniors to obtain their prescriptions at lower prices, but evidence currently shows that other public programs are doing a much better job of controlling cost. Therefore, it’s the responsibility of the government to continuously monitor the performance of the various prescription coverage plans by auditing the private companies that manage them. According to a study by the Government Accountability Office, the Centers for Medicare and Medicaid Services (CMS) “has not met the statutory requirement to audit the financial records of at least on-third of the participating [Medicare Advantage] MA organizations for the contract years 2001-2005.” Without any government regulations or incentives, the private sector can slip into a downward spiral, in which financial greed overpowers the desire to help retirees obtain the medications they need at a reasonable cost. The federal government must continually review the cost of these drugs for seniors to protect them from “high and rising drug costs.” With open enrollment beginning this November, it will be interesting to watch the progress of Medicare Part D as a joint public-private venture.